Vedanta Buys Back Debt as 38% Yield Shows Market Shut to Miners

  • Agarwal's group has $2.9 billion of bonds, loans due in 2016
  • Company offers to repurchase $500 million of convertible debt

Billionaire Anil Agarwal’s Vedanta Resources Plc is seeking to buy back debt at a discount to chip away at a $2.9 billion maturity wall in 2016, as the bond market shuns mining companies amid a commodity rout.

India’s biggest producer of aluminum and zinc offered to repurchase $500 million of its $1.13 billion of convertible bonds due in July 2016 via an auction that closes on Jan. 18, according to its tender offer document. The lowest bidders will have the best chance of repayment. Vedanta’s 2018 conventional note is trading at 57 cents on the dollar for a 37.6 percent yield.

The offer adds to debt buybacks and asset sales by mining groups and trading houses including Glencore Plc and PT Indika Energy as the five-year slide in commodity prices shows no signs of ending. London-listed Vedanta relies on three quarters of its operating profit from zinc and oil, which fell this week to their lowest levels in six and 12 years, respectively.

“Bond prices at these levels show us that there is no trust for the company, so refinancing could be a problem in the future,” said Jens Zimmermann, who manages $275 million at Volksbank Pforzheim EG near Frankfurt and who intends to tender some of its holding. “A lot of mining companies have the same problem but the most of them are not able to make such an offer. This tender will help the bonds.”

The group has been successful in refinancing its maturing liabilities during 2015 through rollovers, issuing new debt and using internal accruals, it said in a November conference call. It declined to comment on its finances or the outlook for commodity prices, Mumbai-based spokesman Esha Razdan said in an e-mail on Jan. 13. Vedanta skipped dividend payments in its latest interim results as losses widened to $324 million. The company managed to eke out $36.5 million of net cash flow and reduced its net debt by $924 million to $7.54 billion at the end of September.

The 2016 convertible notes rebounded to 87.97 cents on the dollar after dropping to 79.5 last year, while the company’s shares lost half their value. Vedanta’s $750 million of 9.5 percent 2018 notes are at 56.9 cents as of 9:18 a.m. in Hong Kong, Bloomberg-compiled prices show. Its $1.2 billion of 6 percent 2019 bonds are at 47.7 cents. They both lost more than 20 percent in 2015, following two rating cuts by Standard & Poor’s deeper into junk category.

Risk Premium

Losses in Vedanta mean Indian dollar junk bonds are off to their worst start to a year since Bank of America Merrill Lynch started an index tracking the securities from 1998, declining 5.6 percent through Jan. 14, following a 7.8 percent loss in 2015. Investors demand an average of 31.52 percentage points of extra yield over Treasuries to own Vedanta notes. The risk premium for the broader market stood at 11 points.

“Some of the bonds are oversold, considering the fact that Vedanta has been able to generate positive cash flow, cut its capital expenditures and reduce its net debt,” said Nuj Chiaranussati, an emerging-market credit analyst in Singapore at Gimme Credit LLC. "The company will want to roll over more debts as it needs to keep a sufficient level of liquidity in this downcycle.”

Vedanta’s bond buyback came in the footsteps of Glencore’s efforts to trim some of its $30 billion debt load by scrapping dividends and selling new shares and assets to appease investors. Peers including PT Indika Energy, Yancoal International Resources Development Co. and Olam International Ltd. also bought back notes in recent months.

Apart from the convertible bonds, Vedanta had $4.1 billion of short-term borrowings due within one year, according to its financial accounts on Sept. 30, or 26 percent of its borrowings. Its net debt to earnings before interest, tax and depreciation stood at 2.6 times in September, compared with a 2.75 times ceiling in some of its debt covenants.

“Vedanta bonds are pricing in a fairly adverse scenario for both commodity prices and the company’s ability to refinance its 2016 debt,” said Nicholas Yap, a credit analyst in Hong Kong at Mitsubishi UFJ Securities Co., who doesn’t expect any near-term rebound. “While the group has various options to refinance upcoming maturities in mid-2016, it is difficult to have any real conviction on the longer-dated bonds at this stage.”

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